Death, Taxes and Attorneys’ Fees in Construction Disputes

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According to Benjamin Franklin there are two certainties in this world: Death and taxes. Let me humbly add a third if you’re ever involved in non-contingency civil litigation: Attorneys’ fees.

As such, when it comes to legal disputes, sophisticated parties know that it’s not just about winning but the cost of winning. While winning is never certain – remember Poor Richard’s proverb above –  what is certain is that it will most likely cost you to find out whether you’ve won or lost. That’s why the ability to recover (or at least threaten the recovery of attorneys’ fees – that’s a separate discussion altogether) in litigation and arbitration is so important.

A few facts:

  • According to the National Center for State Courts (NCSC) in their 2013 report, Measuring the Cost of Civil Litigation: Findings From a Survey of Trial Lawyers, the median cost of litigation (i.e., attorneys’ fees) for contract disputes, of which most construction disputes would fall under, was $90,575 from case initiation through post-trial disposition.
  • The NCSC survey was conducted in 2013. Adjusting for inflation, the median cost of litigation would be nearly $115,000 in 2022.
  • Further, attorneys responding to the NCSC survey were from across the U.S. According to Clio in its 2021 Legal Trends Report, California attorneys have the fourth highest average hourly rates in the nation behind Washington, D.C., Delaware, and New York. Adjusted by state, the median cost of litigating a construction dispute in California in 2022 is approximately $135,000.

In short, even if you win, and there’s no guarantee that you will win, the mere cost of litigation can comprise a large portion of or even exceed the amount in dispute. Thus, while most cases settle before trial – According to the California Judicial Council’s 2021 Court Statistics Report, 80% of unlimited civil cases (i.e., cases involving claims over $25,000) are resolved prior to trial – it is important to know from the outset whether you would be entitled to recover your attorneys’ fees if you do win.

So, are you entitled to recover your attorneys’ fees in a construction dispute? It depends. And here, it’s important to understand the difference between “the American Rule” and “the English Rule.”

The American Rule vs. The English Rule

Under the English Rule, the losing party in litigation is required to pay the winning party’s attorneys’ fees.

Under the American Rule, each party must pay its attorneys’ fees whether they win or lose, except if provided otherwise by statute or contract.

Among legal scholars there’s debate about how and why “the English Rule” and “the American Rule” were developed. However, we’ll leave that discussion to the academics on either side of the Atlantic. What’s more important for purposes of this discussion is when a party can recover their attorneys’ fees in a construction dispute.

And that’s where the exception noted above takes on vital importance. Under the American Rule each party must pay their own attorneys’ fees whether they win or lose, except if provided otherwise by statute or contract. So under what statutes and under what contracts can a winning party recover their attorneys’ fees in a construction dispute?

Statutes and Contracts in Which Attorneys’ Fees are Recoverable by the Winning Party

Attorneys’ Fees Recoverable Under Contracts

We’ll start with contracts. First, parties to a contract can, with certain exceptions, agree to anything they wish in a contract. This includes the recovery of attorneys’ fees in the event of a dispute. A typical provision in a design or construction contract providing for the recovery of attorneys’ fee might read as follows:

Should any dispute arise relating to the work under this Contract, the prevailing party shall be entitled to recover its attorneys’ fees.

This is a rather straightforward example and there can be numerous variations. Some variations will provide for the recovery of attorneys’ fees arising from disputes relating to the work to be performed under the contract or to disputes concerning the terms of the contract itself. Other variations will cap attorneys’ fees to a certain dollar amount, to a “reasonable” dollar amount to be determined by a judge, jury, or arbitrator, or include no limitation at all and allow a party to recover all attorneys’ fees “actually incurred.”

One variation that is generally not allowed however is recovery of attorneys’ fees by one party alone. For example, in a construction contract between a general contractor and subcontractor (and, obviously, one drafted by the general contractor or its attorney), the general contractor might include a provision providing that in the event of a dispute only the general contractor is entitled to recover its attorneys’ fees but not the subcontractor. Civil Code section 1717 makes such provisions “reciprocal,” meaning that if the subcontractor prevails, the subcontractor would be entitled to recover its attorneys’ fees against the general contractor as well.

Attorneys’ Fees Recoverable in Arbitration: A Potential Trap for the Unwary

It is not unusual for design and construction contracts to provide that disputes be resolved through arbitration. In California, parties will often specify the arbitration provider and the specific rules that will govern disputes to be resolved through arbitration. A typical provision might read as follows:

Should any dispute arise relating to the work under this Contract, the parties agree to resolve the dispute  through the American Arbitration Association (AAA) under the AAA’s Construction Industry Arbitration Rules and Mediation Procedures.

The two most common arbitration providers in California are the American Arbitration Association (AAA) and JAMS. In Southern California, parties also use the Arbitration Mediation Conciliation Center (AMCC) in addition to AAA and JAMS.

A trap for the unwary is AAA’s arbitration rules. Under AAA’s arbitration rules, including its Construction Industry Arbitration Rules and Mediation Procedures, an arbitrator may award attorneys’ fees if: (1) all parties have requested such an award; (2) if it is authorized by law; or (3) if it is provided for in the parties’ arbitration agreement.

Many parties, including their counsel, will reflexively request attorneys’ fees in arbitration and litigation without consideration of whether there is an attorneys’ fee provision in the parties’ contract. Under the AAA’s rules, because an arbitrator can award attorneys’ fees if “all parties have requested such an award,” a party may inadvertently trigger recovery of attorneys’ fees even though the parties’ contract does not include an attorneys’ fee provision.

Attorneys’ Fees Recoverable Under Statute

Attorneys’ fees are also recoverable if provided for under statute. There are three common statutes in which construction claims are brought in which the underlying statute provides for the recovery of attorneys’ fees. The first is stop payment notice claims. Civil Code section 8558 provides for the recovery of attorneys’ fees in a stop payment notice action on private works projects.

The second is payment bond claims. Civil Code section 9564 provides for the recovery attorneys’ fees in a payment bond action on public works projects. A party may also recover attorneys’ fees if provided for under the terms of a bond on a private works project.

Finally, attorneys’ fees are recoverable on certain prompt payment penalty claims. Civil Code sections 3320, 3321, 8800 and 8818, Business and Professions Code section 7108.5, and Public Contract Code section 10262.5 provide for the recovery of attorneys’ fees in prompt payment penalty claims on private works projects and certain public works projects.

Attorneys’ Fees Recoverable in Discovery: Another Potential Trap for the Unwary

Attorneys’ fees can also be recovered through discovery. Specifically, requests for admissions served while a case is in litigation or arbitration. A request for admission is a discovery tool in which a party requests that another party “admit” to the truth to certain facts or documents. An example might be:

Admit that you were paid in full by the Owner for Subcontractor’s Pay Application No. 1

If this was discovery served by a subcontractor to a general contractor and the general contractor denies that it was paid by the owner for the subcontractor’s pay application no. 1, and this turns out not to be true, the subcontractor or its counsel can request that the court award the subcontractor its attorneys’ fees in proving the truth of the matter asserted.

Specifically, Code of Civil Procedure section 2033.420 provides:

(a) If a party fails to admit the genuineness of any document or the truth of any matter when requested to do so under this chapter, and if the party requesting that admission thereafter proves the genuineness of that document or the truth of that matter, the party requesting the admission may move the court for an order requiring the party to whom the request was directed to pay the reasonable expenses incurred in making that proof, including reasonable attorney’s fees.

(b) The court shall make this order unless it finds any of the following:

(1) An objection to the request was sustained or a response to it was waived under Section 2033.290.

(2) The admission sought was of no substantial importance.

(3) The party failing to make the admission had reasonable ground to believe that that party would prevail on the matter.

(4) There was other good reason for the failure to admit.

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